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If you are one of the lucky people who receive a raise and or a bonus at work or you just received a windfall and you want to spend that money more wisely, then this article is for you.
Most people who receive a raise or a bonus tend to just spend on one thing, and it’s usually an impulse buy that gets them into more debt. Or it’s just a complete waste of money.
I get it, you worked hard and you deserve that extra money. But don’t forget all the responsibilities you have in your life.
I’ve listed 10 ways where you should be spending that extra money you are about to receive. But if you are not getting a raise or a bonus this year, this list will also help you spend and allocate your money more wisely in the future.
1 – Contribute more into your retirement accounts
If you are not contributing the maximum amounts to your retirement accounts, then you need to put that extra money here. Whether that be your company sponsored 401K account, Roth IRA (if you qualify), 403B, or a Traditional IRA.
If you haven’t opened one yet, then do it today.
You need to be contributing as much as you can to these accounts and invest in Index funds that charge a low fee.
I know it’s difficult to save for your future and most people don’t want to think about themselves as old, feeble and grey. But you need too. Who is going to take care of you financially when you’re old?
Nobody but you, that’s who. The earlier you start putting money into these accounts the better. Investing is all about time. The more time you have for your money to grow and work hard for you, the more money you will have when you are at retirement age.
It can literally cost you hundreds of thousands of dollars if you keep delaying to start funding your retirement accounts.
Read more about retirement accounts here.
2 – Pay down your credit card or student loan debts if you have any
If you have credit card and or student loan debt, then you should put that extra money into paying these down.
The interest rates that credit cards charge you are absolutely absurd. The more you pay down, the closer you will be to being debt free. And you will no longer have to fork over all this extra money from interest payments to the credit card companies.
Student loan debt is the worst. Remember you can never get rid of them, not even if you file for bankruptcy. So you need to make it a priority to pay this down, especially if you have extra money on hand.
3 – Pay back any friends or family members you borrowed money from
If you borrowed money from a friend or family member and you’ve been putting paying them on the back burner, then you need to pay them back.
Relationships tend to crumble when money is not paid back to friends and family. Especially when they know you are receiving extra money and you don’t make it a priority to pay them back.
Everyone works hard for their money. And if you don’t pay money that you borrowed from the people that are close to you in your life, that just shows how little respect you have for them.
So pay them back.
4 – Contribute to your Emergency Fund
Everyone should have at least an 8 month emergency fund. If you don’t have 8 months saved up yet, then you should put that extra money here.
To calculate how much you need is simple. Just take every single necessary bill that you pay every month (food & shelter) and multiply that amount by 8. That is how much you need in your emergency fund.
This money needs to be liquid, so it should be sitting somewhere you can easily get access to it in case of emergencies such as a job loss. I like to keep mine in an online savings account such as CIT Bank that yields higher interest rates.
Do not put this money in any type of investment account.
5 – Contribute more or open an Investment account
If you have done all of the above, then why not open or contribute more money into your investment account?
That extra money can be growing and working harder for you in a brokerage account, Robo Investing account, or invest in Digital / Cryto Currencies such as Bitcoins.
6 – Save to purchase a home
If you want to purchase your first home, then you should put that extra money towards saving for your 20% down payment.
I would not put less than 20% for a down payment on a home because you will then need to pay for Private Mortgage Insurance and your monthly payments will be outrageously high. Read more about the true costs of owning a home here.
7 – Pay down your mortgage
If you have a mortgage to pay off, why not put that extra money towards that? This is definitely one of my goals.
I will be completely debt free after paying off my mortgage, so I am diligently working towards that. After contributing to my retirement and investment accounts, the leftover monies I have goes towards paying off my mortgage.
I am looking forward to the day where I have completely paid off my mortgage and have no debt whatsoever.
8 – Purchase Term Life Insurance
If you have people depending on your income, then you need to purchase Term Life Insurance. If not, then you can skip this step.
If you have kids, a spouse, a pet or anyone else that relies on you to take care of them financially, then you need to make sure you have Term Life Insurance coverage in place. If anything were to happen to you, then you can rest assure that your loved ones will be taken care of financially.
9 – Save for a vacation
I love going on vacations. It’s the one thing I don’t mind spending money on because it gives me so much pleasure and so many great memories and experiences.
But you need to be financially responsible before going on a nice lavish vacation. Aside from having an 8 month emergency fund, you should also keep a separate liquid cash account for your vacation fund.
If you ever dreamed of going to Europe, the Caribbean or anywhere else, start saving money for it.
10 – Splurge on yourself
If you have done all of the above and still have some money left over, then congrats to you!
You either have a great paying job and or you are severely financially responsible.
We all aspire to be this person one day. At least I do. So go ahead and buy that Tesla or that house on the beach. You deserve it.
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